Road to recovery: hospitality on hold

We look at the challenges and recovery strategies in the hospitality sector to recover from lockdown 2.

  • The Local Restrictions Support Grant is encouraging hospitality businesses to close
  • CJRS extension is welcomed – but it’s light on detail
  • City hotels expect a better performance than in holiday destinations
  • If lockdown continues into December, it will be too much for many businesses

Hospitality businesses are faced with a stark choice this lockdown: do they offer a takeaway service, or close completely to get a Local Restrictions Support Grant? It’s not as easy a decision as you’d think; there’s a risk involved in staying open, competing with established takeaways and spending on perishable ingredients.

“I’ve got quite a few restaurant clients who are deciding not to take the risk,” says Samantha Perkin FMAAT, director of Cornwall-based practice Zamu. “It is just better to just close completely and take the grant than to risk opening and not make the same amount, or make £3,000 and then pay out the costs of running a business.”

It goes without saying that this has been a rough few months for the hospitality sector. Industry analysts Red Flag Alert revealed a significant spike in business debt across the hospitality sector: insolvent debt among the hotel and accommodation sector increased from £5.9m to £12.4m between March and June while travel and tourism businesses saw levels of bad debt increase from £5.1m to £9.1m during the same period.

Paula Rutter MAAT, assistant to finance director at a Norwich-based hotel, says the hotel she works at faces a similar situation. “Although our hotel has been busy since restrictions were lifted during the summer, business has now dropped by 20% compared to early October, and with the approaching winter months, business on the books is looking bleak.”

New furlough lacks detail

While the CJRS extension has been welcomed by the sector, there’s also concern about the lack of clarity around the rules. This is more of a problem for their accountants – Perkin says that her clients have said of furlough: ‘we’ll leave you to sort it out’. She says that it has already proved to be a bit of a headache.

“They’ve already told us that people who’ve gone on to the payroll and had an RTI done prior to the 30 October can be furloughed, whereas before they had to be on in March, so that allows us to put new people on furlough, but what about if they’ve had a pay rise between March and October?”

The National Minimum Wage increased in April this year, but previously, furlough was calculated based on the old National Minimum Wage. It is unclear whether the furlough extension will continue on the old rate, or switch to the new National Minimum Wage. “What if someone has been fully furloughed 100% of that time period? They’ve never been paid the new national minimum wage, so what number do we use?”

David Chaplin, chartered accountant and CEO of the Chaplin Group of hotels, has done better than most. He has overhauled his businesses with a raft of technological innovations, from now common ‘order-at-table’ apps and devices, to thermal imaging cameras used to identify people with high temperatures. He also took the opportunity to update the group’s accounting systems – modernising and streamlining them to improve financial planning and forecasting.

He kept only a core group of staff working during the previous period, with all other staff on furlough. This time, he says, everyone will be taking at least some time on furlough, including senior staff. This, he says, will increase the sense of camaraderie among staff. “It’s better that everybody’s in the same boat and everybody feels that they are contributing in both ways.”

Adapting cost bases and staff shortages

Chaplin and his accounting team reviewed the group’s cost base near the beginning of lockdown. He took a risk and actually increased his prices as the first lockdown restrictions eased. This educated gamble paid off: while the volume of sales was down, revenue actually increased across the business.

Coastal hotels did better than the group’s hotel in Cambridge: the coastal hotels were up 140% on the previous year, while the Cambridge location was dow 40%. This was down to a more domestic customer base than you would usually expect – holidaymakers from other countries are more likely to stay in cities.

Demand was such that the hotels had a shortage of kitchen staff, but it was hard to recruit new staff members, says Chaplin. There was a reluctance to move to the coast to work, and Chaplin puts this down to the effectiveness of furlough. “If you can stay home on 80% of your pay, why commute to another town for 100% of pay?”

Chaplin was able to move some front of house staff to help out until chefs moved over from Norwich.

Fears for a December lockdown

The other big question for hospitality businesses is: will this lockdown last a month or longer? Will they be able to trade in the crucial month of December? “I would think it essential that we do open over Christmas,” says Chaplin. “If that means that we shut down again in January, so be it. If we don’t re-open over Christmas, a lot of hospitality businesses that simply go to the wall.”

Christmas trade gets many hotels and restaurants through the quieter months of January and February. If the government was to announce on 2 December that they need to extend the lockdown throughout Christmas, suddenly the much-derided £1,000 bonus for furloughed staff kept on until the end of January seems a much more valuable lifeline for hospitality staff fearing for their jobs. “I was rather dismissive of it back in the summer because at that point, it looked little by comparison,” says Chaplin. “Now, it actually has real effects. Whether that is elegant design or by accident, I don’t know.”

Perkin agrees that missed December trading could be devastating for the sector; particularly for mid-priced restaurants. Even if they can open in December, many are expecting lower than normal trade as people decide not to take the risk. “You’re going to have cheap and cheerful restaurants – they will survive. You’re going to have the really expensive, top-end locations, they have enough money to sit out the bad times. All those middle-market restaurants that most of us go to when we want to go out for reasonable dinner will really struggle. I think a lot could be gone.”

Industry-specific support needed

Hospitality businesses feel that they are being unfairly scapegoated for spreading the virus and causing the second wave when they’ve invested in many safety measures in line with government guidance. They also want to see more sector-specific measures from government to help them through this difficult time.

“They need support with specific and written for them with the help of their trade bodies,” says Perkin. “I’m not sure how it would work – the government need to reach out to businesses and professional bodies.”

Alex Campbell, partner at law firm FieldFisher and hotel and leisure finance specialist, is optimistic that the sector will eventually bounce back, but it would take time. “Most people have considered 2020 a write off,” he says. “It will be April 2021 where the sector is hoping to see a return to normality. It’s not going to be a full return, but a gradual one over a long period.”

Rutter agrees. “We are all just looking forward to next April when the season can begin again,” she says. “We have a recovery plan in place and have staffing levels confirmed for over the winter, and we’re hoping to use the government scheme to protect our employees. We just need to survive the winter and support our staff financially and mentally.”

Mark Rowland is a journalist and former editor of Accounting Technician and 20 magazine.

Related articles